When a married student or a dependent student's parents get divorced
or separated before the application date, it is often necessary to
separate out the income of the student or the custodial parent from
a joint income tax return.

Financial aid administrators should ask for a copy of the divorce
decree or separation agreement, as sometimes the document will contain
language that specifies an appropriate treatment for the income.
Otherwise, the financial aid administrator should first try to
separate income that is clearly attributable to each family member
(i.e., from W-2 statements showing the earnings of each). Then any
investment earnings should be split either according to the titling of
the account (i.e., joint accounts are split evenly) or the division of
assets. If there is insufficient information to properly divide an
asset, an even split is appropriate. Taxes paid can either be
calculated using the tax tables as if a separate return were filed
(preferred method) or by prorating the actual taxes paid according to
the percentage of joint AGI attributable to the parent.

Financial aid administrators occasionally encounter parents who claim
to have been separated or divorced on the date the FAFSA was
completed, but to have reconciled shortly afterward. Often these
parents are trying to game the system on a technicality. Most financial aid
administrators will treat such parents as married. As noted in
Parent Remarries After Application Date,
household size and number in college can be updated for changes in the
parent's marital status after the application date, and financial aid
administrators may use professional judgment to include the income and
assets of the "new" spouse. Whether the parents were temporarily
separated on the application date is potentially irrelevant, since the
financial aid administrator has the option of basing his or her
decision on the parents' marital status as of the verification date.
The financial aid administrator should ask
for a copy of any divorce decrees, legal separation agreements,
marriage certificates, and evidence that the couple maintained
separate households before making a decision. The financial aid
administrator should also ask for the date the separation started and
ended and whether it was a legal separation or an informal separation.

Rather than focus on technicalities, the financial aid administrator
might want to ask whether the couple will likely remain
married for the remainder of the award year. If the financial aid
administrator believes the answer to be yes, it is reasonable to
treat them as married for need analysis purposes. If the couple is
now, in fact, divorced, it is reasonable to include only the custodial
parent's financial information.

According to the verification guide (see below), separation can
include either informal separation or legal separation. There are two
main types of separation. Both involve a cessation of cohabitation by
husband and
wife. Neither dissolves the marriage. A legal separation involves the
court system and the issuing of a court order. Rules relating to legal
separation vary from state to state. A legal separation usually also
resolves any financial claims, such as financial support issues. An
informal or trial separation does not involve a court order, merely
the cessation of cohabitation.

(Note that since separation does not dissolve a marriage, a student
who is separated is still considered married for the purpose of
determining dependency status. Such a student should answer "Yes" to
the question "As of today, are you married?". See, for example, the
bottom of page AVG-24 of the Verification Guide. This is different than
the treatment prior to 1992, when a separated student was not
considered married for independent student status purposes.)

In some states a couple can continue to cohabit after a
legal separation. But in no circumstances may a couple
continue to live in the same house and have an informal
separation -- separate bedrooms doesn't cut it. In some
states a legal separation is part of the process of
obtaining a divorce, as a kind of enforced "cooling off"
period.

A written support agreement is required for one spouse to
take a deduction for payments made to the other spouse.

An informal separation is very difficult to document, and
might not have any documentation (e.g., one of the spouses
moves out of the house to live with a friend or relative).
Since informal separation does not require any kind of formal
documentation, it is prone to abuse, with parents claiming
to be separated solely to obtain additional aid for their
children's education.

For documentation of a legal separation, financial aid administrators
should require a copy of the court order. For documentation of an
informal separation, financial aid administrators should require
evidence that the parents were living apart, such as rent checks, copy
of the leases, copies of utility bills, photocopies of driver's licenses
showing different addresses, a letter from a third party
certifying that the spouse was living with them, etc. Be wary of sham
arrangements, in which the husband or wife is conveniently absent from
the household just for the week in which the FAFSA is submitted (e.g.,
one spouse goes off on a business trip and indicates that it is a
separation on the FAFSA, providing hotel receipts as documentation)
and reconciles immediately afterward.

The maintenance of separate households is a key concept for need
analysis. For example, when a student's biological parents are
divorced, the custodial parent is identified as the parent with whom
the student lived the most during the past twelve months. Only when
the student didn't live with one parent more than the other is the
determination based on financial support. So separate households are
considered primary criteria and financial responsibility secondary.

Since an informal separation is prone to abuse and doesn't
require separate finances or address support issues, financial aid
administrators should apply extra scrutiny to such situations. At least with
a legal separation the parents have to jump through a few hoops
and can provide clearcut documentation in the form of a court
order. Possible considerations can include the duration of the
separation and whether the separation began conveniently close to the
FAFSA application date. Some financial aid administrators require a
minimum separation of at least six month's duration, the same standard
used by the IRS for head of household filing status.

Verification Guide (Page AVG-31): Separation of the student's parents or the student and spouse
A couple doesn't have to be legally separated in order to be
considered separated. The couple may consider themselves informally
separated when one of the partners has left the household for an
indefinite period of time. Usually a married couple that lives
together can't be considered informally separated. However, in some
states, a couple can be considered legally separated even if they
still live together. If the couple's state allows this, and they are
legally separated, then they are considered separated though they are
still living together. For a dependent student, use the same rules as
for divorce to determine which parent's information must be reported.

Eight states do not have a concept of "legal separation": Alaska, Delaware,
Florida, Georgia, Idaho, Mississippi, Pennsylvania and Texas. In these
states one can be single, married, widowed, or divorced, but not
legally separated. As such, all separations in these states are
informal. (It is not uncommon to prepare a separation agreement to
specify such matters as division of property and support and even
custody prior to a divorce decree, but such a separation agreement
does not have any special legal standing beyond being a legally
binding contract.)